Roadmap to economic recovery [Part – II]

The first part in this series (Roadmap to economic recovery’, June 20) discussed why we keep falling into crisis situations. It avers that the economy does not focus on growth. Low public and private investment are behind uneven growth and falling exports. For public investment, the government needs to both cut cost and increase revenue.

Cutting cost by managing debt: Looking at the government’s high interest expense, there is no better way to cut cost than to reduce the debt burden. For a cash-starved public sector, it is not easy to pay back debt. Nor is the economy growing at a pace to spawn returns that help repay. So, we must seek debt relief.

Once again, the IMF will be central to this effort. Once restored, Pakistan must go beyond the present IMF’s EFF programme. A plan to avoid future current account crises should lie at the centre of any substantial engagement with the IMF.

In essence, Pakistan’s foreign debt is no longer viable. The IMF considers our debt sustainable from a cash flow point of view. Under its programme, we will get enough fresh loans to meet the current account deficit and to pay back the creditors their due.

Yet, as we take on more debt to repay past debts, the payment due to outsiders has grown beyond the economy’s ability to pay. Debt payment is forcing the country to postpone its other critical needs. Foreign debt servicing is more than 50 per cent of exports and about a quarter of exports plus remittances.

It is possible to make the IMF agree to debt relief and for it to take the lead in coordinating with other lenders. Relief would come in the shape of lower interest rate or creditors taking a haircut on the principal amount, or their combination. To convince the IMF that we will not seek such help again, we must go to them with a sound plan for economic growth, exports and correction of elite privilege. Debt relief will not prevent Pakistan from borrowing more to meet payment due to creditors. Except, we will do so under an arrangement. And there will be severe conditions attached – though I do not expect that they would be any more harsh than what we see today.

Pakistan has credible cause to make the appeal. For one, in 20 years Pakistan has received less cash than it has paid outsiders. That is, the amount we have borrowed in 20 years is less than the sum paid back by us as principal and interest. Yet, the stock of debt owed to outsiders is today three times more than what it was 20 years ago. This is the perverse logic of compounding. During this period, we have paid $1.4 billion annually as interest alone. And this amount is growing each year.

Whether low-cost credit or any other, the share of interest in total servicing is high. It ranges from 20 per cent for IFIs to 51 per cent for Paris Club lenders – the latter because of rescheduling by them.

Where debt buildup and interest paid are concerned, concessional debt is a euphemism. There is not much difference in cost to the government. The title of concessional debt merely makes the debtor smug and adds to the myth of the benefit of foreign debt.

Often the debt is not put to the best use. Over 70 per cent of new debt is for balance of payments support. That does not build our ability to repay. Pakistan has been less than judicious in this regard. Yet, the lenders with their vast knowledge resource also kept lending. To that extent, creditors too are responsible. In 20 years, Pakistan has transferred a lot of its scarce resources to creditors in rich countries.

There is an alternative to the IMF. The G20 members in the last meeting set up the ‘Common Framework for Debt Treatments’. It aims to deal with insolvency and liquidity problems in 29 low-income economies. It will do so by providing debt relief according to the debtor’s capacity to pay, and meet crucial spending. Pakistan is included. China has joined the framework, and the OECD assures that private donors too will give due relief.

The government may also explore if it is possible to buy back Pakistan issued euro and other bonds, which are trading well below cost in the secondary market. The rate of interest on these bonds is up to 8.5 per cent. There are many pros and cons. For one, we do not have the resources. Also, prices will increase as soon as it is known that the government plans to buy or when the IMF restores the programme. The intermediary cost is high. Yet, it is possible to set aside funds from say remittances to buy back at a discount. By end March 2022, Pakistan had $8.8 billion in bonds and sukuks. That equals about three months of remittances. Of course, it calls for belt tightening. But there is a cost to managing years of neglect and lack of prudent policy.

At home, years of high budget deficit, an average of over 6 per cent in 20 years, has also built up our rupee debt. Everyone knows that the high debt cannot be returned, but does not admit it to protect their balance sheets.

The SBP and the government must open discussion with Pakistani banks. Restructuring is critical. Banks may either reduce interest rates or cut the principal amount. Again, the IMF may guide this effort. It has recently published a complete guide in this regard.

Cutting cost by reducing subsidy: There is yet another way to cut cost. The government must make the power supply chain viable: For that, it may look at all options. Doing so would reduce the budget deficit and make funds available for development: the power-sector reforms of the 1990s have fallen short of their goals. The lavish comfort offered to investors was needed when first planned, but not forever. The economy cannot support the cost of the reforms. Also, the sector is too complex to be solved by the simple idea of private participation in infrastructure. Having earned their returns, the original investors have mostly left. It is now clear that the consumer or the government does not have the means to meet the cost.

In any case, because of long delays in paying the tariff subsidy, a part of profits of power producers stays on the books for years without getting realized. This is hardly a desirable situation. Power supply still has many problems, while the cost of power has grown. The government’s debt liability builds up, and IPPs await payment of the subsidy. Everyone suffers – producers, buyers, and government. Industrial production and exports have been especially hit.

Cut PSE subsidy: There is also an urgent need to take a considered decision on PSEs. Many of them have been in the red for years. Taxpayers cannot be asked to pay for enterprise inefficiencies. Even those organizations, such as Pakistan Railways and PIA, that have had captive markets are in loss. Where the loss is caused by lower than cost tariffs, the government may quantify and subsidize. These calculations must be made public. In other cases, organizations must be privatized.

DISCOs are a special case. In essence, they are a monopoly in their area of supply. Yet they incur high losses, costing both consumers and taxpayers. And they delay payment to power producers. The government may consider privatizing DISCOs. This must be done with specified cost and performance indicators.

To be continued

The writer, former commerce

minister, is chair and CEO of the Institute for Policy Reforms.